by Anonymous on 4/26/2007 10:30:00 AM

James Surowiecki in the New Yorker ("Subprime Homesick Blues") makes a plea for maintaining access to subprime lending:

But what’s often missed in the current uproar is that while a substantial minority of subprime borrowers are struggling, almost ninety per cent are making their monthly payments and living in the houses they bought. And even if delinquencies rise when the higher rates of the 2/28s kick in, on the whole the subprime boom appears to have created more winners than losers. (The rise in homeownership rates since the mid-nineties is due in part to subprime credit.) We do need more regulatory vigilance, but banning subprime loans will protect the interests of some at the expense of limiting credit for subprime borrowers in general. And while the absence of a ban means that some borrowers will keep making bad bets, that may be better than their never having had the chance to make any bet at all.

I don't, really, know what to say to someone who thinks there's an outright ban on subprime lending on the table, or who writes "even if delinquencies rise when the higher rates of the 2/28s kick in." The theory is, you see, that the "higher rates of the 2/28s" are the higher rates needed to make up for the higher delinquencies. It's usually called the "risk premium." If people can't afford to pay the risk premium, that suggests that their risk cannot be priced: there are no loan terms that the borrower can afford that will also cover the cost to the lender of the borrower's likelihood of default. The traditional response to a request for credit that cannot be adequately priced is to deny the request. Continuing to lend at a discount to the true premium seems like a curious way to avoid losses, but one undoubtedly makes it up on volume.

In any case, we certainly wouldn't want a regulatory regime that makes it hard for subprime borrowers to gamble on real estate. Of course, you'd have to define "winning the bet" before you'd conclude that the House sometimes loses, and some of us aren't sure that making outrageous house payments equal to 50% of your take-home on time for 30 years for a depreciating property is properly classified as "winning." Before I'd get all fired up about letting the punters punt, I'd want to know if this is Monte Carlo or Three-Card Monte.

On the other hand, it makes more sense than just asking all the sellers to stop selling until the buyers get desperate again.

by Calculated Risk on 4/25/2007 09:38:00 PM

"I'd like to make an appeal to everybody who does not need to sell to take your home off the market."
Marianne Zoll, April 25, 2007, Re/Max 5 Star/Zoll Real Estate & Auction Team.

I've never heard of this before.

by Calculated Risk on 4/25/2007 05:13:00 PM

Some people are confused as to why starts are so high (around 1.5 million on a Seasonally Adjusted Annual Rate SAAR) and New Home sales so low (0.85 million SAAR). They ask: why aren't reported inventories surging?

The answer is new homes offered for sale are a subset of starts. Starts also include homes being built by owners and units being built to rent.

Click on graph for larger image.

This graph shows total starts, starts of single unit structures, and new home sales since 1970.

During some periods (early and late-70s, mid'80s) there was a surge of apartments being built (think baby boomers leaving the nest in the '70s). But in all periods, you can't compare starts (either total or one unit structures) directly to new home sales.

Luckily there is more data available from the Census Bureau, but only on a quarterly basis. See this document: New Privately Owned Housing Units Started in the United States, by Intent and Design

In Q4 2006, there were 278K one family units started (actual, not SAAR). Of these, 205K were intended for sale and the remaining units were either intended as rental units or built by an owner (either using a contractor or by themselves).

In addition, in Q4 2006, 34K units in multi-unit buildings were started intended for sale. So the actual number of units started, with intent to sale, were 205K plus 34K equals 239K.

Also from the Census Bureau, there were 216K units sold in Q4 2006. So the inventory of homes for sale should have increased slightly (by about 23K). Now this last calculation doesn't work exactly (the Census Bureau reported inventory decreased by 24K in Q4 2006), but that is probably because of timing issues. Just remember you can't compare Starts to Sales directly.

by Calculated Risk on 4/25/2007 03:52:00 PM

From Standard & Poor's: Ratings On 20 Subprime And 32 Alt-A Classes From 2005-Vintage RMBS Deals Put On Watch Neg

Standard & Poor's Ratings Services today placed its ratings on 52 subordinate classes from 45 residential mortgage-backed securities (RMBS) transactions issued in 2005 on CreditWatch with negative implications. The affected classes are rated [from] 'A-' [to] 'B'.

The CreditWatch placements reflect early signs of poor performance of the collateral backing these transactions. ...

Many of the 2005-vintage transactions may be showing weakness because of origination issues, such as aggressive residential mortgage loan underwriting, first-time homebuyer programs, piggyback second-lien mortgages, hybrid ARMs entering their reset periods, and the concentration of affordability loans.

It will interesting to see if there is any impact from the incipient credit crunch on Countrywide Financial and IndyMac Bancorp - they both report tomorrow morning.

by Anonymous on 4/25/2007 02:42:00 PM

Freddie has a new press release out on severe delinquencies, showing stable numbers since year end (0.53%).

What was of interest is the above chart, comparing reported delinquency reasons in the period 2001-2005 versus 2006. Note that the delinquency reasons are reported by the mortgage servicer, as a contractual requirement. The "Other" category is actually an aggregation of a lot of miscellaneous reason codes, which range from property transfer in progress to borrower skipped to borrower incarcerated. As Freddie Mac notes,

"This analysis underscores the magnitude of difference between Freddie Mac's 0.53 severe delinquency rate and those in the subprime market," said Freddie Mac Chief Economist Frank Nothaft. "The drop in job and income related delinquencies reflect the growth we've seen in payroll jobs, excluding the manufacturing sector, but the uptick in late payments due to excessive debt is potentially troubling because it is independent of economic trends and suggests some borrowers are having a harder time handling their financial obligations than in past years."

by Calculated Risk on 4/25/2007 12:01:00 PM

For more graphs, please see my earlier post: March New Home Sales: 858 Thousand SAAR

Click on graph for larger image.

The first graph shows New Home Sales vs. Recession for the last 35 years. New Home sales were falling prior to every recession, with the exception of the business investment led recession of 2001. This should raise concerns about a possible consumer led recession in the months ahead.


The second graph compares annual New Home Sales vs. Not Seasonally Adjusted (NSA) New Home Sales through March.

At the current pace, new home sales for 2007 will probably be around 850 thousand - about the same level as the late '90s. This is significantly below the forecasts of even the most bearish economists. As an example, Fannie Mae's chief economist David Berson projected new home sales of 975K for 2007. Berson was one of the most bearish of the main stream economists, and unfortunately, his forecast is "no longer operative".

The third graph shows monthly NSA New Home sales. This provides a different prospective of the housing bust.

For existing home sales, March marks the beginning of the spring selling season. However, for New Home sales, March is typically the strongest month of the year (March was the top sales month 16 of the last 22 years). This is because New Home sales are reported when the contract is signed - and buyers are hoping to move during the summer. Existing home sales are reported at the close of escrow - so the early summer months are usually the strongest months of the year.

by Calculated Risk on 4/25/2007 09:59:00 AM

According to the Census Bureau report, New Home Sales in March were at a seasonally adjusted annual rate of 858 thousand. Sales for February were revised down to 836 thousand, from 848 thousand. Numbers for December and January were also revised down.


Click on Graph for larger image.
Sales of new one-family houses in March 2007 were at a seasonally adjusted annual rate of 858,000... This is 2.6 percent above the revised February rate of 836,000, but is 23.5 percent below the March 2006 estimate of 1,121,000.


The Not Seasonally Adjusted monthly rate was 84,000 New Homes sold. There were 108,000 New Homes sold in March 2006.

On a year over year NSA basis, March 2007 sales were 22.2% lower than March 2006. March '07 sales were the lowest since March 1999 (84,000).


The median and average sales prices were up. Caution should be used when analyzing monthly price changes since prices are heavily revised.

The median sales price of new houses sold in March 2007 was $254,000; the average sales price was $330,900.


The seasonally adjusted estimate of new houses for sale at the end of March was 545,000.

The 545,000 units of inventory is slightly below the levels of the last six months. Inventory numbers from the Census Bureau do not include cancellations - and cancellations are at record levels. Actual New Home inventories are much higher - some estimate about 20% higher.


This represents a supply of 7.8 months at the current sales rate.


More later today on New Home Sales.

by Anonymous on 4/25/2007 09:17:00 AM

FED reports:

At March 31, 2007, negative amortization, included in the balance of loans receivable, totaled $248.5 million compared to $215.8 million at December 31, 2006 and $98.5 million at March 31, 2006. Negative amortization represents unpaid interest earned by the Bank that is added to the principal balance of the loan.

Negative amortization increased by $32.7 million during the first quarter of 2007 and $150.0 million from one year ago. Negative amortization has increased over the last two years primarily due to increases in short-term interest rates. Negative amortization as a percentage of all single family loans in the Bank's portfolio totaled 4.36% at the end of the first quarter of 2007 compared to 3.44% at December 31, 2006 and 1.32% at March 31, 2006.

The portfolio of single family loans with a one-year fixed monthly payment totaled $4.4 billion at March 31, 2007 compared to $4.6 billion at December 31, 2006 and $4.7 billion at March 31, 2006. The portfolio of single family loans with three-to-five year fixed monthly payments totaled $1.5 billion at March 31, 2007 compared to $1.8 billion at December 31, 2006 and $2.5 billion at March 31, 2006.

A $3.8 million loan loss provision was recorded during the first quarter of 2007, compared to a $3.0 million provision recorded in the fourth quarter of 2006 and a $3.9 million provision recorded in the first quarter of 2006. Net loan charge-offs totaled $628 thousand for the first quarter of 2007 compared to $90 thousand in the fourth quarter of 2006 and $25 thousand in the first quarter of 2006. The ratio of non-performing assets to total assets was 0.46% at March 31, 2007 compared to 0.21% at the end of 2006 and 0.07% at March 31, 2006.

Non-performing assets have been very low over the past few years due to increases in single family home prices. The recent increase in non-performing assets results primarily from the flattening of single family real estate prices overall in California. Areas such as Sacramento or San Diego that have experienced rapid growth in housing development in the past few years have seen recent declines in single family home prices. To date, the Bank's non-performing assets are due to defaults on single-family loans and are located principally in those geographic areas where rapid development of housing has caused supply to outpace demand. It is expected that non-performing assets will continue to increase until the real estate prices in these areas reach an equilibrium between buyers and sellers.

by Anonymous on 4/25/2007 07:30:00 AM

Good morning, Calculated Riskers. It's Wednesday, and you know what that means: Wall Street has discovered that there's fraud in them loans! Alert the media!

Well, actually the media is alerting us. Bloomberg is on the case already, in "Subprime `Liar Loans' Fuel Housing Bust With $1 Billion Fraud." Sure, you thought the liar loans fueled the housing boom, and that the "liar loan" problem was hardly confined to subprime, but that's because you're a permabear.

Read the thing if you must; I'm sure you'll enjoy the reference to the MARI report on exaggerations of stated income that has been reported on approximately one gajillion times since its original publication one year ago, and is apparently the last research on the question anyone is ever going to do until the archaeologists take over.

What I noticed is what isn't here: any recognition that Wall Street has known about the explosion in "stated income" lending since the git-go. You will note the reference to volume numbers provided by Credit Suisse. CS would be getting these numbers from LoanPerformance or some similar database of securitized loans. The reason the database has that information is that "doc type code" is a required field at the loan level. It is--sit down, this will shock you--used to price the loans that Wall Street is buying. That is where that additional quarter of a point cost to the borrower mentioned in the article comes from. These decisions about how to price risk do not come from random confluences of impersonal forces of nature that are invisible without a pair of Spectrespecs.

But Wall Street is paying attention:

Low documentation loans were established in the 1980s mainly for the self-employed and non-U.S. citizens whose pay was difficult to verify. They can be processed quicker than standard loans and typically cost the borrower an extra quarter point on his mortgage. They were made possible by relaxed lending guidelines, or what Bear Stearns Cos. analyst Gyan Sinha calls ``Hail Mary underwriting.'

OK. Stated income loans "were made possible by relaxed underwriting guidelines." Who made up those relaxed underwriting guidelines? At what point, exactly, did Bear Stearns notice this? Is Bear saying that its own underwriting guidelines were mere exercises in counting rosary beads, or that someone else's were? Does that mean Bear manages risk by delegating the formulation of credit policy for billions and billions of securitized loans to some pissant mortgage broker? Does it tell the SEC that? And what's with this "were" business, anyway? Nobody's doing stated income any longer? That is news.

Ladies and gentlemen of the press: we have, actually, established the culpability of borrowers and brokers on the bottom and foreign central banks and other nefarious sources of liquidity on the top. Could we, maybe, spend a minute looking at the middle of the chain? Unless I am sorely mistaken, the Street has been accepting a lot of fees lately for "underwriting" mortgage-backed securities. Perhaps we could ask them about their own "Hail Mary" problem for a change?

by Calculated Risk on 4/24/2007 01:22:00 PM

In a research note titled "US Views: On Track?", Jan Hatzius, Chief US Economist at Goldman, Sachs & Co. commented today on residential construction employment.

"We expect ... evidence of labor market slowing over the next few months. ... our expectation [is for] a large decline in construction employment ..."
Jan Hatzius, April 24, 2007

Note: Excerpts used with permission.

Click on graph for larger image.

This graph shows starts, completions and residential construction employment. (starts are shifted 6 months into the future). Completions follow starts, and employment usually tracks completions.

Based on historical correlations, it is reasonable to expect BLS reported residential construction employment to follow Starts and Completions "off the cliff" soon. One of the current mysteries is why residential construction employment (the blue line) is holding up so well.

Hatzius doesn't believe the problem has to do with the mis-classification of employees (some have suggested that the strength in non-residential construction might be masking weakness in residential construction employment):

"... the mis-classification hypothesis can't explain why overall construction employment is flat while overall construction activity ... has been falling [significantly]."

And what about undocumented illegal immigrants?

... does the layoff of undocumented immigrants who don't show up in the statistics "insulate" the payroll data, i.e. do the illegals lose their jobs so the regular employees can stay on the payroll? ... I don't think the story ultimately holds up. First, it can't explain why residential payroll employment did track activity very closely on the way up, but (so far) not on the way down. Second, while remittances to Mexico -- one of the few proxies for undocumented immigrant employment -- have fallen slightly over the past year, the pattern broadly tracks residential construction employment (which after all is also down, just not as much as we had expected). Third, the household survey of employment, which may pick up a larger share of immigrant employment because it includes independent contractors, shows an even stronger performance of construction employment than the establishment survey over the past year (though there is no res/nonres breakdown).

Update: On the following remittance data from the WSJ, Hatzius has sent me a graph of the growth rate (using a 3 month moving average), and the slow down in remittance does appear gradual. From the WSJ today: Latin America Feels Pain Of U.S. Housing Slump

Monthly remittances from the U.S. to Mexico have dropped every month since their peak of $2.6 billion in May 2006 -- shortly before new-home construction in the U.S. plunged. In February 2007, the latest month for which data are available, remittances to Mexico had slowed to $1.7 billion.

Mexico, Latin America's remittance leader, may be a leading indicator of a trend unfolding across the continent. In a recent study of 15 Latin American economies tracked by BCP Securities of Greenwich, Conn., all but three showed better than a 90% correlation between the ebb and flow of U.S. housing starts and the swelling and shrinkage of remittances as recorded by the nations' central banks.

So what is the answer to the residential construction riddle? In an earlier note, Hatzius suggested there might be some "hoarding" of employees, as many employers anticipate a turnaround in housing. From Roubini: Explaining the Mystery of Why Housing Jobs Have Not Fallen Much...and the Worsening Housing Recession...

The [hoarding] argument, presented by Jan Hatzius, the excellent U.S. economist for Goldman Sachs, is that home builders decided not to fire workers when housing starts started to fall last year because they were expecting a housing recovery this year. So they hoarded labor. Then the observed fall in housing construction productivity that we see in the data since 2006 is directly related to this labor hoarding. However, he argues that, if as likely, the recovery of housing does not occur this spring the home builders will have to start laying off such workers. So we will soon see the effects of this on the labor market.

Another possibility is that the BLS is missing a turning point in the residential construction employment area. From the BLS:

The most significant potential drawback ... is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

Whatever the reason, Jan Hatzius expects BLS reported residential construction employment to decline significantly over the next few months. So do I.